Stock prices and intrinsic values Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security. In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Q1. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? a. A stock’s market price is often based on investors’ perceived risk in the company. b. The intrinsic value of a stock is based only on perceived investor returns. Q2. You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the corporate valuation model to estimate the value of the company’s stock? a. A company that has a stable distribution policy. b. A company that is not expected to distribute any earnings to its stockholders for the next few years. Q3. Which of the following describes the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply. a. Most people have an important stake in the stock market. b. Most investors appreciate the risk companies take to maximize their stocks. c. People like to work for companies that minimize operating costs. d. Successful companies benefit consumers.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 11QE: Market equity beta measures the covariability of a firms returns with all shares traded on the...

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Stock prices and intrinsic values

Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.

In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.

Q1. Based on your understanding of stock prices and intrinsic values, which of the following statements is true?

a. A stock’s market price is often based on investors’ perceived risk in the company.

b. The intrinsic value of a stock is based only on perceived investor returns.

Q2. You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the corporate valuation model to estimate the value of the company’s stock?

a. A company that has a stable distribution policy.

b. A company that is not expected to distribute any earnings to its stockholders for the next few years.

Q3. Which of the following describes the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply.

a. Most people have an important stake in the stock market.

b. Most investors appreciate the risk companies take to maximize their stocks.

c. People like to work for companies that minimize operating costs.

d. Successful companies benefit consumers.

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